Friday, May 11, 2012

In Las Vegas today at the SALT Conference, the talking stock panel focused on perspectives from value investing legends such as Leon Cooperman of Omega Advisors, Barry Rosenstein of JANA Partners, and Joel Greenblatt of Gotham Capital.

Barry Rosenstein of JANA Partners talked about how he's been involved in activist investing since the 1980s and thinks today's environment for it is the best he's seen. They've been an activist in McGraw-Hill (MHP). And though not an activist stake, we've posted JANA's thesis on Barnes & Noble, one of their latest investments.

He also touched on his firm's lack of exposure to financials, noting that the sector is too hard to analyze. Rosenstein will be presenting an investment idea at the NYC Value Investing Congress in October. Market Folly readers can receive a discount here with code N12MF3.

Leon Cooperman of Omega Advisors reiterated his stance that US government bonds are fundamentally overvalued. We've highlighted his case against bonds numerous times before.

In terms of stock picks, he has allocated capital to financials via AIG (AIG), E*Trade (ETFC), Capital One (COF) and Western Union (WU). On the political side of things, he deemed this upcoming election one of the most important in his lifetime.

Joel Greenblatt said he likes tech giants Microsoft (MSFT) and Hewlett Packard (HPQ). He also mentioned Wellpoint (WLP) and CVS Caremark (CVS). His book You Can Be a Stock Market Genius, despite its somewhat cheesy title, is recommended by tons of top hedge fund managers.

Whitney Tilson, the moderator of the panel, said his hedge fund T2 Partners was buying more JPMorgan Chase (JPM) TARP warrants this morning. We also recently posted T2's presentation on AIG.

He also advocated Saudi equities, saying that it's like India in 2003 as hardly anyone is investing there yet. We've posted up Passport's Saudi equity theses as well. Burbank additionally said a euro sovereign crisis is ahead.

Robert Koenigsberger talked about how the BRICs are overbought (Brazil, Russia, India China). Also, even though investors usually find volatility and downtrodden markets as potentially good places to invest, he thinks it's too early to invest in Europe.

Karthik Sankaran pointed out India and China as the most interesting emerging markets. He also likes interest rate plays.

First, the hedge fund firm has revealed a 5.5% ownership stake in Comstock Resources (CRK) with 2,625,646 shares. This marks a 250% increase in their position size since the beginning of the year. The filing was made due to portfolio activity on May 4th.

Per Google Finance, Comstock Resources is "engaged in the acquisition, development, production and exploration of
oil and natural gas. The Company’s oil and gas operations are
concentrated in East Texas/North Louisiana, South Texas and West Texas.
The Company’s consolidated proved oil and natural gas reserve base is
85% natural gas and 15% crude oil. Its proved reserves are 46% developed
on a billion cubic feet equivalent basis as of 2011."

Tilly's (TLYS)

Citadel has also initiated a brand new stake in Tilly's (TLYS). They've revealed a 7.9% ownership stake in the company with 724,681 shares due to activity on May 4th. The company just completed its initial public offering (IPO) and so it appears as though Citadel participated in that.

Per Google Finance, Tilly's is "a specialty retailer of West Coast apparel, footwear and accessories.
The Company has brands in action sports, music, art and fashion. The
Company’s stores are designed to be an extension of its teen and young
adult consumers’ lifestyles with a balance of guys and juniors
merchandise."

Wilmot Harkey's hedge fund Nantahala Capital Management recently filed two 13D's with the SEC. The hedge fund primarily focuses on small caps and has a market-neutral discipline.

Imperial Holdings (IFT)

First, they've disclosed a 9.65% ownership stake in Imperial Holdings with 2,045,707 shares. The filing was made due to activity on May 10th and marks a .6% increase in their position size since the beginning of the year.

In the 13D, Nantahala includes a statement in the purpose of transaction section:

"Bulldog Investors General Partnership, pursuant to an authorization statement dated April 25, 2012, which has been filed with the Securities and Exchange Commission, is soliciting from shareholders of the Issuer authorizations to demand a special meeting of shareholders to, among other things, amend the bylaws of the Issuer to increase the number of directors from seven to twelve and to elect five directors to fill the vacancies created by such increase. The Reporting Person has determined to execute the revocable authorization supporting the calling of such meeting with respect to Shares reported in this Schedule 13D because it believes that it is in the best interests of shareholders for a meeting to be held to consider such matters. "

Per Google Finance, Imperial Holdings is "a specialty finance company with a focus on providing premium financing
for individual life insurance policies issued by insurance companies and
purchasing structured settlements backed by annuities issued by
insurance companies or their affiliates. In its premium finance business
it earns revenue from interest charged on loans, loan origination fees
and agency fees from referring agents. In its structured settlement
business, it purchases structured settlements at a discounted rate and
sells such assets to, or finances such assets with, third parties."

Adams Golf (ADGF)

Second, the hedge fund has also filed an amended 13D on Adam's Golf (ADGF) and they've sold over half their position in the name. They now own 3.927% of the company with 313,960 shares. They sold on May 8th at a price of $10.75.

A few months ago, it was announced that TaylorMade-adidas Golf Company was acquiring Adams Golf for $10.80 in cash (shares currently trade around $10.78). It appears as though Nantahala is ready to put some of this capital to work elsewhere with the deal spread pretty tight.

Thursday, May 10, 2012

At the SALT Conference in Las Vegas today there was a panel called "From Crisis to Renewal: Uncovering Opportunities." It featured Kyle Bass of Hayman Capital, Dmitry Balyasny of Balyasny Asset Management, Steven Tananbaum of GoldenTree Asset Management, as well as John Bader of Halcyon Asset Management.

Talking about the generational balance in Japan, Bass says there's now more adult diapers being sold than baby diapers in that country. He compared Japan to Bernie Madoff in that lying works until there isn't new money coming in - you can make promises and there won't be any issues as long as you don't have to follow through.

We've posted his Bass' presentation on Japan before as well. At SALT he said that the country is already monetizing their debt so it's just a matter of time.

He admitted to making a mistake in 2009 by not anticipating all the printing by the sovereigns. He focuses on the losses and forgets the gains, he says.

As to what the Hayman Capital man recommends now: long non-agency MBS credit while shorting Europe and Japan. The hedge fund manager also said that Greece would be "ungovernable" in the near future.

Dmitry Balyasny talked about how he is 'neutral' on US companies but always hunting for quality picks.

Steven Tananbaum cited his propensity to favor corporate debt and mortgage backed securities (MBS) as longs in this environment.

John Bader pointed out that there are plenty of liquidation plays in this environment. He also advocated seeking out uncorrelated strategies. Bader does not seem to be convinced the crisis is over.

We wanted to highlight the latest version of Columbia Business School's newsletter: Graham & Doddsville. In their latest edition, they publish interviews with Tiger Management's Julian Robertson and Kynikos Associates' Jim Chanos,

Below are some excerpts we found insightful from the Tiger Management founder:

Julian Robertson on his investment philosophy: "I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don't outperform the 50 worst stocks you can come up with, you should be in another business ... For my shorts, I look for a bad management team, and a wildly overvalued company in an industry that is declining or misunderstood."

Robertson on evaluating an initial idea: "The first thing is, is the management decent and honest? A lot of people don't really care about that. The way to look into that is to do some diligence."

On qualities he looks for in seeding funds: "Competitiveness. Is he a competitor?" He references that he often likes athletes due to their will.

Robertson's favorite plays (aside from Google and Apple): "I love WuXi (WX) which is a Chinese-based employment agency for PHDs, primarily in the drug industry ... the company's earnings are certainly increasing beautifully at about 20% a year and it still sells at 10x earnings."

Good insight from the interview with the Kynikos founder:

Jim Chanos on his early experiences in investing and lessons learned: "I recommended a short position in Baldwin-United at $24 ... the stock promptly doubled on me. This was a good introduction to the fact that in investing, you can be really right but temporarily quite wrong." (He started Kynikos with $16 million, $1 million of which was his own money.)

Chanos on long versus short: "I've learned there's a big difference between a long-focused value investor and a good short-seller. That difference is psychological and I think it falls into the realm of behavioral finance ... if you're a short-seller, that's a cacophony of negative reinforcement. You're basically told that you're wrong in every way imaginable every day. It takes a certain type of individual to drown that noise and negative reinforcement out and to remind oneself that their work is accurate and what they're hearing is not."

On skills essential to succeed: "Start first with the SEC filings, then go to press releases, then go to earnings calls and other research. Work your way out. Most people work their way in."

Chanos' current positions: Short natural gas industry in the US, betting against the coal industry. He also thinks for-profit education business is flawed. In his Opportunity Fund, he's currently short Chinese property companies and long Macau casinos. We've also posted some of his other short positions.

The newsletter also features write-ups from MBA students on Avon Products (AVP), Ingersoll-Rand (IR), Legg Mason (LM), and H&R Block (HRB) as well as interviews with Tom Russo and Alexander Roepers.

At the Skybridge Alternative Conference (SALT) in Las Vegas yesterday, a panel on risk featured Harbinger Capital's Phil Falcone, Sprott Asset Management's Eric Sprott, Blackrock's Rick Rieder, as well as PIMCO's Daniel Ivascyn. The talk was entitled, "Risk On, Risk Off: How to Generate Profits in a Macro Driven World."

Phil Falcone of Harbinger Capital Partners essentially referenced his Lightsquared venture when he made comments regarding investors being too fixated on liquidity. He argues that people are passing on solid long-term opportunities because they want access to their capital. The Harbinger man believes regulation has hurt the free market.

He also went on to say that because of the market's risk on/risk off mentality, there are many who aren't even paying attention to fundamentals out there. The manager labeled the market one of the most difficult to time investments.

Eric Sprott of Sprott Asset Management is yet again pounding the table on gold due to the problems in Europe. He also commented on the "post-Lehman" world and mentioned that there can't be liquidity events as that could bring down the whole system.

Rick Rieder talked about how investing strategies are shifting from beta to idiosyncratic. He also believes that contagion isn't as big of an issue in Europe.

Daniel Ivascyn stressed the importance of aligning the right vehicle with the investment opportunity. Long term opportunities need to be placed in the right structure, he says.

J. Carlo Cannell's hedge fund firm Cannell Capital recently filed an amended 13G with the SEC. In it, they reveal a 4.8% ownership stake in Sun Healthcare Group (SUNH) with 1,213,745 shares. This is around a 24% decrease in their position size since the end of 2011.

The disclosure was required due to trading activity on March 23rd, 2012 (quite a delayed filing it seems, but nevertheless wanted to highlight this activity). We've highlighted Cannell Capital before as the firm was founded in 1992 and focuses primarily on small cap value plays.

Wednesday, May 9, 2012

Jeff Erber and Grey Owl Capital are out with their Q1 letter to investors and in it they highlight how they're approaching investing in a low-return environment. They're employing a three-pronged attack as follows:

2. Invest in short dated high-yield fixed income: Given that the Fed has in the past signaled potentially raising rates in 2013, this short-dated approach makes sense. They've purchased the following bonds (with full write-ups on each stake in the below letter):

MGM Resorts 6.75% 9/2012 - purchased in December 2011
CSC 5.5% 3/2013 - purchased in January
Western Alliance Bancorp 10% 9/2015 - purchased in early April

3. Hold plenty of dry powder anticipating better opportunities: This might look counterintuitive at first glance given that holding cash earns you practically nothing, especially in a low yield environment. However, consider that many hedge fund managers often hold cash as a hedge and as a utility to deploy when better investment opportunities arise. That's exactly what Grey Owl has done as they've deemed the current set of opportunities less desirable and they think better prices to buy at lie ahead.

Avenue Capital's chairman and founder Marc Lasry was on Bloomberg TV yesterday giving an interview where he talked about investing in European debt. He also said investors should focus on the the world's largest economy, the US, rather than China. He's been focused on homebuilders and on the energy side, mainly focusing on senior secured.

He talked about raising $3 billion for a special situations fund to
invest in European debt. He argues that you need a lockup with that
money because these situations are going to take years to play out. Here's the video:

The hedge fund manager also touched on his distressed focus, noting that while others might think he's taking on a lot of risk, he doesn't believe so since he often deals with senior secured debt.

He mentioned how he learned a lot from David Bonderman. One of the best lessons he learned is: "there's a difference between what the perception is and what the actuality is."

He also talked about his love for poker as he regularly hosts games. Lasry says there's many similarities between investing and poker as the card game is very mathematical. In the past, we've highlighted the high amount of hedge fund managers that play poker.

In a 13G filed with the SEC, George Soros' family office Soros Fund Management has disclosed a 10.13% stake in Digital River (DRIV) with 4,162,494 shares via convertible bonds.

According to an SEC Form 3 filed as well, this stake is in
the form of 2.00% convertible bonds due 2030 with a conversion price of
49.13. These bonds are convertible at any time and mature on November
1st, 2030.

They also disclose an additional 128,974 share stake via 1.25% convertible bonds due 2024 with a conversion price of 44.06.
The investment firm has boosted their holdings by almost 35% in the past two months. We previously posted when Soros started a stake in DRIV back in March.

Per Google Finance, Digital River "provides end-to-end global cloud-commerce and marketing solutions to a
range of companies in software, consumer electronics, computer games,
video games and other markets.

Nelson Peltz's Trian Fund Management just filed a 13D with the SEC and revealed a brand new position in Ingersoll-Rand (IR). Per the filing and as of May 8th, they now own 7.33% of the company with 21,885,406 shares.

Of this stake, 14 million shares are common stock and 7.6 million shares are represented by options. The started building their position in March and have continued buying into May at prices ranging from the high $39.xx to mid $42.xx

Trian has filed this 13D jointly with the California State Teachers' Retirement System. As to why Trian acquired they stake, they write:

"(IR) has an attractive collection of businesses, total shareholder returns and profitability have lagged peers, and that there is an opportunity to enhance shareholder value by improving certain key financial, operational, compensation and corporate governance metrics and by considering various strategic alternatives, including a restructuring of its key business segments."

They're seeking addition of new directors to the board, to improve operating margins, and for the company to use "prudent" amounts of leverage to increase the company's stock buyback program.

In Trian's recent letter to investors, they mentioned they've built up 3 new core positions and that they would be publicly revealing them soon. Ingersoll-Rand is one of them, so we'll have to wait and see what the other two are.

Per Google Finance, Ingersoll-Rand is "a diversified, global company that provides products, services and
solutions to enhance the comfort of air in homes and buildings,
transport and protect food and perishables, secure homes and commercial
properties. IR-Ireland operates in four business segments: Climate
Solutions, Residential Solutions, Industrial Technologies and Security
Technologies."

Just wanted to let readers know that all posts from the Value Investing Congress in Omaha have now been updated with the actual slideshow presentation from each speaker where applicable. Please follow the links below to the respective notes and presentations:

Steve Cohen's hedge fund SAC Capital has been busy filing 13G's with the SEC the past few days. In total, they've filed ten different times. Cohen was named one of the top 25 highest earning hedge fund managers of 2011. Here's his fund's latest activity:

1. Sequenom (SQNM) - The hedge fund has boosted its holdings in SQNM by quite a large margin since the end of last year. They now own 5.4% of the company with 6,128,919 shares. This is due to portfolio movement on May 7th.

Per Google Finance, Sequenom is "a diagnostic testing and genetics analysis company. The Company is
focused on providing products, services, diagnostic testing,
applications and genetic analysis products that translate the results of
genomic science into solutions for biomedical research, translational
research, molecular medicine applications, and agricultural, livestock
and other areas of research."

2. Zillow (Z) - This is a brand new position for SAC Capital as they did not report a stake in their last disclosure at the end of 2011. They now own 5% of Zillow with 1,011,501 shares due to activity on May 7th.

Per Google Finance, Zillow is "a real estate information marketplace. The Company provides information about homes, real estate listings and mortgages, through its Website and mobile applications, enabling homeowners, buyers, sellers and renters to connect with real estate and mortgage professionals."

3. Western Refining (WNR) - SAC Capital has increased its stake by a whopping 287% since the beginning of the year. They now own a 5.4% ownership stake in the company with 4,860,883 shares due to activity on May 4th.

Per Google Finance, Western Refining is "an independent crude oil refiner and marketer of refined products and
also operates service stations and convenience stores. WNR operates in
three business segments: the refining group, the wholesale group, and
the retail group."

4. Yelp (YELP) - The company completed its initial public offering at the beginning of March this year and this is a brand new position for Cohen's hedge fund. They now own 415,847 shares, or 5.1% of the company. They were required to file a disclosure due to crossing a regulatory threshold in trading on May 4th.

Per Google Finance, Yelp "connects people with local businesses. Its users contribute reviews of
every type of local business, from restaurants, boutiques and salons to
dentists, mechanics and plumbers. Its platform provides local businesses
with a range of free and paid services, which help them to engage with
consumers at moment when they are deciding where to spend their money."

5. Movado Group (MOV) - SAC Capital now owns 5.11% of Movado Group as they've built a position of 943,890 shares. They only owned a tiny 11,347 share position at the end of 2011 so they've certainly ratcheted up their stake this year.

6. Accretive Health (AH) - This stake has been increased since their last disclosure and SAC now owns 5% of the company with 5,005,600 shares due to activity on May 4th.

Per Google Finance, Accretive Health is "a provider of services to the healthcare providers. The Company’s three
offerings are revenue cycle management; quality and total cost of care,
and physician advisory services. Its integrated revenue cycle management
service offering helps the United States healthcare providers to manage
their revenue cycles, which encompass patient registration, insurance
and benefit verification, medical treatment documentation and coding,
bill preparation and collections."

7. Walter Energy (WLT) - The hedge fund disclosed ownership of 3,143,160 shares of WLT due to trading activity on May 3rd. They now own 5% of the company and have boosted their holdings by around 30% since the end of 2011.

8. Santarus (SNTS) - Cohen's firm started a new position in Santarus and now own 3,231,392 shares, or 5.2% of the company.

Per Google Finance, Santarus is "a specialty biopharmaceutical company focused on acquiring, developing
and commercializing products that address the needs of patients treated
by physician specialists."

9. Clearwater Paper (CLW) - This position is slightly different in that SAC filed an activist 13D on the name. As of the beginning of May, they now own 1,640,000 shares (or 7.2% of the company). In recent trading, they were out purchasing shares on April 26th, 27th, and 30th at prices in the high $32.xx and low $33.xx.

The hedge fund feels that Clearwater would be worth more if it split up. They feel that the sum of the parts are worth more separate than in their current combined entity. SAC portfolio manager David Rosen wrote a letter to the company as SAC is currently the third largest shareholder.

They feel that the company's consumer products division is worth between $990 million and $1.4 billion. They argue that the pulp and paperboard division is worth $770 million to $960 million. But as of recent trading, Clearwater's entire market cap is only $786 million.

10. Select Comfort (SCSS) -SAC Capital now owns 5.02% of Select Comfort (SCSS) with 2,848,996 shares. At the end of 2011, they only held a tiny position so they've boosted their holdings by over 1,500% since then.

Per Google Finance, Select Comfort is "a bed manufacturer and retailer. The Company designs, manufactures,
markets and distributes the SLEEP NUMBER bed and other sleep-related
products. The Sleep Number bed features DualAir technology, which allows
couples to adjust each side of the mattress to his or her level of
firmness."

Tuesday, May 8, 2012

If you missed it, Market Folly readers can receive a massive 50%
discount to the Value Investing Congress in New York City on October 1st & 2nd. This discount expires tonight at midnight! Take advantage by clicking here and using discount code: N12MF1

David Einhorn (Greenlight Capital) is confirmed as a
speaker. Last year at this event he presented the short case for Green
Mountain Coffee (GMCR) and since then shares have plummeted 73%. Two
years ago at this event, he said to short St. Joe (JOE) and shares are
down 28% since then. And before that, he advised shorting Lehman
Brothers at this event and then the company went under. Hear his next
great idea at this year's VIC.

Barry Rosenstein (JANA Partners) is
also confirmed to speak. The event-driven investor is famous for
generating shareholder value through activism. Just recently, the fund
took a huge stake in Barnes & Noble and shares are up over 55%
since then. Hear their next big idea as this event.

Tons of other great hedge fund managers
will be speaking as well. A ticket to this conference normally costs
$4,595. The special price for our readers is only $2,395.

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Doug Kass of Seabreeze Partners. His talk was entitled, "The end of the bond bull market from an equity investor's perspective."

The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital. Kass quoted Warren Buffett: "Chains of habit are too light to be felt until they are too heavy to be broken."

Doug Kass argues that shorting bonds has been a great hedge against profits. He says that shorting bonds might be the trade of the decade - to go against the grain and short bonds. This is currently the largest position Kass has ever taken in his partnership. Will Rodgers says that "You have to go out on the limb because that's where the fruit is."

The End of the Bond Bull Market

Example of risk of extrapolation: Siegel stocks for the long run - labeled stocks safe for the long-term right about the top. Howard Marks: "extrapolators fail to understand that things mean regress. And crown wrong at extremes."

BusinessWeek - "Death of Equities" was right at the end of the lost decade of equities and then the market gains 18% per year after the article was published and then did 19% annually for the next 20 years with only 2 down years.

Real GDP 2.5 and inflation of 2% = 4.5% with current yield of 1.9% - "tons of daylight in the middle."

He also discussed Ocwen Financial (OCN) - subprime mortgage servicing. Banks are getting out of servicing and outsourced portfolio solution $12 at spin in 2009 to $60. Trades at 15 and will earn $2 per share in 2013.

Embedded below is Doug Kass' slideshow presentation on the end of the bond bull market:

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Aaron Edelheit of American Home Real Estate Company. His talk was entitled, "Housing: The Foundation of the Next Bull Market."

98% of metro areas are cheaper to buy than rent (Per Trulia). Implications: Residential REITs, Home Depot (HD) and Lowes (LOW), homebuilders will do well.

His Pick: Lender Processing Services (LPS)

- $2 billion market cap. Housing at bottom: service 50% of mortgages by volume. Return to normal volumes will help them. Spun out of Fidelity National (FIS) in 2008. FCF "juggernaut" > $300mm FCF per year. Repurchased 11% of stock in last year. Could have $5 EPS and 12x multiple. Risk is lawsuits, but manageable. The above notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Embedded below is Aaron Edelheit's presentation on the housing market:

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Chuck Akre of Akre Capital Management. He gave an insightful talk on using good judgment in investing. We've also posted a separate post with his bull case for MasterCard (MA).

On Judgment in Investing

The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital. Akre quoted Will Rodgers: "Good judgment comes from experience and experience comes from bad experience."

He learned to ask the questions: what makes a good investment? And what makes a good investor?

Good judgment is output of neural network and pattern recognition of what you have come to know. Ask CEOs how they measure their success of company. Akre suggests "the success of investment is realized as the per unit increase of book value per share."

Have courage. Have patience. Thinking big and compounding capital: most investors don't think on large enough scale. $10mm a penny doubled daily for 30 periods. Recommends "Money Masters" by John Train.

Look for low teen ROE. Overconfidence bias is a huge risk. Malcolm Gladwell's talk on the recent financial crisis: failure comes from competence and overconfidence. Essence of study people overly believing marginally more information. But this doesn't improve the accuracy of judgment but does increase the confidence of one's predictions. "Less is more." "Value is in simplicity."

This is just one of our posts on Chuck Akre's talk. We're also posting up his bullish stance on MasterCard (MA).

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Whitney Tilson & Glenn Tongue of T2 Partners. They presented their idea of American International Group (AIG).

Spencer Capital aided in the presentation. Bruce Berkowitz of Fairholme Capital presented AIG last year and T2 now likes it. We've posted up Berkowitz's presentation on AIG before if you missed it.

Idea: AIG

• Very much different from before crises
• Worth at least 1x tangible net book
• Will get easier to understand in the next year
• Closed at $31.84 (yesterday) and is trading at 41% discount to book
• US took ownership form 70% to 60% in today sale.
• Chartis – 45MM clients
• Sun America – 19MM clients – life insurance.
• ILFC – global aircraft leasing business. Comps are around 1x book.
• Maiden Lane III – SPV. Currently at $6.3 billion and on market for sale.
• Large deferred tax asset position
• August 2007 $170 billion market cap. Trading at 1.75x book at that point.
• Question is now how much will the US government make?
• Peak of support is $182 billion form US – now about $45 billion investment at 3/31/12.
• Sum of parts is $49 to $73 per share
• Normalized earnings are ~$5 per share.
• T2 thinks AIG will buy back shares
• Management incentives are to understate book value.
• Warrants are very attractive.

Question & Answer Session

P&C business? Very large esoteric investments as well? Yes AIG is still good at these big investments. Government wants out - probably won't be out by election but the government is not in the business of holding AIG.

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes from Chuck Akre of Akre Capital Management. We've already posted up Akre on using good judgment in investing. Below is his bullish case for MasterCard (MA).

Investment Idea: Purchase MasterCard (MA)

- Payment network, global GDP summation of transactions. Royalty business on growth of consumer spending worldwide earning small piece of trillions of transactions across the world. 45% FCF return over last 5 years.

- Requires little capital to grow. 5 years was $680mm capex while after tax NI increase $1,900 over the same time (2002 to 2007). Pricing power. People: new CEO is solid.

- Cash is 85% of world's transactions and MA will benefit from the shift to payments. 37% FCF margins in 2011.

- ACH is banks system but not handle large number of small transactions rather built to handle few large transactions.

Question & Answer Session

Why prefer MA to Visa (V)? US domestic debit transactions, $0.42 interchange fee - Durbin suggestion to $0.11 per transaction (ended up at $0.22). MA had mid-teens exposure to US while Visa had much more. Market Folly note: A previous issue of our Hedge Fund Wisdom newsletter has an in-depth analysis of Visa.

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Doug Grey of Saddle Peak Asset Management. His presentation focused on how current interest rates are distorting things and highlighted PepsiCo (PEP).

PEP: Too cheap? Value investors must now look at the macro picture. Pepsi is just an example to discuss how the current interest rate picture is distorting things. Bernanke: Fed view is the flow (buying and/or selling) that dictates the price or level of interest rates, not the quantity of securities held.

Pepsi cost of money in 2002 was 7%, now cost is 2%. Value = EPS / (r - g). With r plummeting 5% there is a significant implication on allocation of capital. So, interest rates make a significance in these valuation matters. CFO of Pepsi should be borrowing money to buy stock. Institutional investors should think about actuarial rate considerations.

Discount rate lowered from 7.75% to 7.5%. Saddle Peak - straightforward - use leverage (i.e. in the money calls). Hedge interest rate risk with ETFs and interest rate futures. "All it takes is guts because no one can tell you when interest rates turn around ... just be what you should be - a patient value investor." The above notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Use of options versus equity - they buy long dated in the money calls. Black Scholes does not accurately price long dated options - rather intrinsic value growth makes these long dated calls very cheap.

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Isaac Schwartz of Robotti and Company. He presented three investment opportunities in Southeast Asia: Sampson Holdings (SEHK:531), Thai Reinsurance (SET:THRE), and KazMunaiGas Exploration and Production (LSE:KMG).

Sampson Holdings - Furniture company selling US, manufacturing in China, listed in Hong Kong. $160mm EV. $423mm 2011 revenue. Perfected manufacturing and experts on distribution side (300 commissioned sales people). Trades different than Ethan Allen due to listing in Hong Kong. Cheap company in out of favor industry.

Thai Reinsurance - Recently Prem Watsa comes in to buy 25% after the Thailand floods. Remarkable 15 year track record. 20% ROE since before Asian crisis in 90's. Has special position in industry due to knowledge. $15 billion insured loss. Rates of many lines have gone up over 100% since the flood.

KazMunai Gas Exploration & Production - Publically listed national oil company of Kazakhstan. The government owns 63% of the company. Went public in London 6 years ago. Spending $1 billion. $300mm share repurchased authorization and $100mm bought to date. Dividend up 63% with only partial earnings payout. KMG is selling at 6x earnings, 7% dividend yield, as well as $2 per barrel valuation for quality and producing assets.

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Bob Robotti of Robotti & Company. He presented the bull case for Enterflex (TSE: EFX).

He thinks natural gas will fill the hydrocarbon gap in the coming decades. 1mm ft cubic is energy of 1 barrel oil - historically interchangeable with 1 barrel of oil. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Investment Opportunity: Enterflex (TSE:EFX)

• Installs compression and processing equipment.
• $980MM EV
• Decade long drilling activity
• Started trading in June 2011
• Oil and gas firms are end customers
• Service is 21% of revenues – key component to this firm. Expected to grow to 40% of revenue in next 3 years.
• Oil compressors – leverages due to fracking technology as fracked gas comes out of the well as low compressed volumes.
• Engines – Caterpillar and Waukesha was 50% (Cat been growing significantly). Waukesha bought by GE from private equity backing. Enterflex distributor for Waukesha.
• 2% dividend yield and share buyback.
• Intrinsic value is $18 to $24 per share. 6.0x to 8.0x multiple on the business.
• Competitive advantage – engine part important (distribution system). As Waukesha engines (Enterflex US distributor) get better from GE engineering this drives margins higher including

Continuing our coverage, today we're posting up more notes from the Value Investing Congress. Below are notes and the slideshow presentation from Bestinver Asset Management's Alvaro Guzman de Lazaro.

Bestinver has seen an average return of 15.2% since 1993. Europe is less efficient than the US. 80% of investments are in family controlled businesses. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Monday, May 7, 2012

Dan Loeb's hedge fund Third Point is out with its Q1 letter to investors. In it, they reveal their investment thesis on Apple, Portuguese Sovereign Bonds, Express Scripts, and more.

Loeb's Thesis on Apple

A few months ago, we flagged when Third Point bought Apple (AAPL) and now we see the rationale for why they did so: capital return. While AAPL announced its dividend and buyback ahead of Third Point's expected timetable, they also like the company for two other reasons.

They bought shares at $445. On valuation, they write: "Currently, Apple is trading at 13.4x CY2012 EPS of $45, and 11.6x CY2013 EPS of $52 ... Adjusting for cash, Apple's valuation drops to 11.1x CY2012 EPS and 9.6x C2013, leaving it inexpensive relative to the S&P 500."

Loeb's hedge fund also points to growth in China and the "halo 2.0" effect as key drivers of future success: "In order to sustain its success, Apple will need to drive its ecosystem experience outside of the US, with multiple devices, content libraries and cloud services. China's enthusiasm for Apple's products and brand is exciting, but investors will need to see whether Apple can establish the ecosystem the way it has in the U.S."

They write, "While we have studied Portugal since last year, it was not until the country's February downgrade to junk by all three rating agencies that we found a truly asymmetric investment opportunity. Many investors liquidated their holdings after the downgrade, causing bonds to decline from the high 50s to the low 40s. Following the playbook that has generated numerous successful investments for Third Point we provided liquidity to sellers when others would not."

On Express Scripts (ESRX) Post Medco Merger

Third Point played the risk arbitrage in the merger between Express Scripts (ESRX) and Medco Health. Post merger, they find the combined entity attractive, writing: "Based on our analysis of the combined MHS/ESRX entity, we believe that Express Scripts remains an attractive investment candidate, combining 15+% EPS growth, the opportunity for accelerated synergy realization, and a reasonable forward PE multiple (13 x 2013 EPS)."

On Their Mortgage Portfolio

The hedge fund writes, "Third Point's mortgage portfolio has remained fairly consistent for the past 6-12 months. We continue to own Alt-A Re-Remic mezzanine bonds, "seasoned" subprime bonds, and CMBS mezzanine bonds. We have recently repurchased some Alt-A floating rate bonds which we previously owned in 2009."

We've posted up notes from both days of the Value Investing Congress in Omaha. Please follow the links below to read about each speaker's investment ideas. All links have been updated with the actual slideshow presentations as well:

About GoodHaven Capital: Before founding GoodHaven, Trauner and Pitkowsky worked at Bruce Berkowitz's Fairholme Capital. After starting the mutual fund GOODX in April 2011, they're in the top 1% of mutual funds.

Their goals are above average returns - consistent with capital preservation. They seek to exude consistent behavior irrespective of short-term performance and want to run towards a fire. "Better yet figure out when conditions are ripe for a conflagration before the match is lit."

Larry's rule is: "Perfection in avoiding permanent loss of capital is impossible but it is a worth goal." They don't diversify, they want money in their best ideas. And of course, price matters: price is what you pay and value is what you get. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

"Back to the Future" Presentation

• Larry and Keith - were buying insurance companies in 1999 and are now doing it again.
• Bought 5% position of BRK at around book.
• Markel – Berkshire like firm with good capital allocation.
• Markel is an owner of GoodHaven.
• Insurance interesting as you get money up front – create value by holding float.
• Past couple years have been tough – catastrophe, poor insurance pricing, ultra-low interest rates, and financial crisis and volatile markets.
• Negatives – inv. Income squeezed, rising rates = bond losses, pressure to increase duration
• Think this might be about to change: Industry comments are getting stronger with respect to pricing
• Interest rates are too low. Central bank is now in 4th year of low rates. Financially destabilizing, societally distorting, historical anomaly, horrible if you bet wrong.

• Strong capital allocators. Have 75% of OneBeacon, 100% of Sirius Group, 20% of Symetra, 100% of White Mountain Advisors.
• White Mountains sold esurance
• Last 3 years good but not great exposure (profitable underwriting)
• Buybacks are hard to ignore from $500 down to 425.
• Shares declining over last 5 years from over 10MM now to just under 7MM.
• Singleton and Teledyne – “largest share shrink in Wall Street history”
• Franklin Mutual is 26.4% of firm, ex CEO controls 10%
• Est. of normalized earnings power is $65 to $85 per share.
• Risks: Foolish capital allocation, larger than expected reinsurance exposure

Question & Answer Session

Have you looked at financials? Stayed away from unknowable factors at the large companies (AIG & BAC). No opinion on AIG. Bought a big slug of Jeffries (2% of balance sheet is Level 3). Market Folly note: You can view Berkowitz's presentation on AIG here.

Elaborate on both companies having investment leverage? Modest increase in investment portfolio will be magnified in per share value.

How do you evaluate insurance company's underwriting? Important to look at management compensation - run up near term EPS or long term value. One Beacon - all incentive comp is tied to having a combined ratio less than 95%.

About D3 Family Funds: Started 17 years ago (David's dirty dogs is how they got the D3 name). "Busted growth companies." Take ~10% stake with firms and work with management. Average investment is ~30MM. Average market cap is $300mm to $400mm. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

On CPX purchase: Just about doubled share count. Dave Dunlop realized the fracking techniques could also be applied to domestic and international oil bases. People thought of the company as gas-levered which created the selloff but not wholly accurate given the oil rig count.

Long term margins pressure pumping? How to think about this? Coil tubing was large business before recent growth of fracking. Queue of projects for coil tubing capacity - no downturn in coil tubing as we have seen in pressure pumping.

Natural gas storage filled up (October) before weather starts to get cold. If too early, price of gas will go down. D3 still likes LT prospect. Don't build position right away.

• SAB Miller, Pernot Ricard, Nestle, Berkshire: Total 4 above 28% of his portfolio. (total 70% international)
• High agency cost risk in public markets
• Used to speak of Weetabix (cereal company with family control) compound of 21%. Was worth £150MM then sold to Hicks use for £600 pounds
• Nestle saying Chinese companies are becoming players on the international front. Sure enough – food firm from China just bought this cereal company for £2,000MM
• Europe is where they are looking now
• Culture of Nestle has culture of centuries old Japanese temple – take the time to do it right: Nestle has 35 year planning horizon.
• Buying brands around the world that are strong and stable – Russo investing in companies’ which are investing across the emerging globe building brands and product lines.
• Holds positions a very long time to take advantage of attributes compounding returns without taxation
• Berkshire: GEICO has $30mm advertising budget in 1996 to $1,000mm over period of owning GEICO. Reason was $250 loss per new sub but BRK changed - but NPV of sub is $1,500. So short term profits down with significant growth of subs. Equity Put Options: $37bn of insurance sold for $5bn. At peak, BRK has $15b of losses on the income statement. $3bn charge for multiple.
• Pernot Ricard (Credit Default Swap mayhem): Invested in China in early 2000’s, Absolute 2009, India now, Family controlled – so can take the losses
• SAB Miller investing aggressively in Africa – huge opportunity over time.
• 300MM bottles of homemade beer – will shift to bottled beer over time in Africa.
• Just bought Fosters – will do well over time.

Question & Answer Session: ABInBev managers 2nd best in the world only to Buffett and Munger. Mentioned Brazilian railway with a 40% ROE.

Today we're posting up notes from day 1 of the Value Investing Congress. Below is the presentation from Chan Lee of Petra Capital Management on Korea as an attractive investment opportunity. Since inception, their flagship fund has returned 20.4% annualized. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Korea: A Goldmine for Value Investors

- Korea is the size of the state of Maine; 7th largest exporter & 10th largest importer in the world

- There are more than 100 net nets on Korean stock exchange - two are Samsung Climate Control and Pangrim (textile producer). Market Folly note: We recently posted up notes from Warren Buffett's meeting with MBA students where the legendary investor said he sees opportunity in Korea as well.

- CJO Shopping: TV home shopping company (71.8% revenue, internet shopping is 18%). Trades 9.9x earnings and is about $1,000mm USD. Stock dropped sharply after Chinese JV as market regarded it as weakening position in China. Public in 2000 acquired by conglomerate. Received 3 new licenses. Average ticket higher than QVC, standard shipping is one day.

- KG Inicis: Leading company in online transactions, focused on South Korea. Not as much Chinese exposure. Trades at 5.9x earnings. Payment gateway service which also owns mobile payment business.

Today we're posting up notes from day 1 of the Value Investing Congress. Below is the presentation from Bruce Zessar and Matt Swaim of Advisory Research on Vail Resorts (MTN) as well as the value of intelligent decisions with shareholder capital. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Value of Dividends and Buybacks

• Dividend policies are important regardless of dividend tax policies.
• Net payout yield = dividends + buybacks
• Dividend is strong signal to market due to stickiness
• Dividends that are material and increasing, earning typically go along.
• Historically 40% to 45% of total return is dividends.
• g = ROE x retention ratio, but Asness and Arnott came to a conclusion that expected future growth is fastest when payout ratio are high and slowest when payout ratios are low. Could be from managers signaling future growth with dividends.
• High net payout yield (dividends plus buybacks less share issuances) produce positive abnormal returns
• Bottom line is to have a good and growing dividend augmented by share repurchases at attractive prices (not the highest yield)
• Companies should pay out something after reaching the positive free cash flow mark either buybacks and/or repurchases
• Owen Accenture, Chubb, Emerson Electric, JP Morgan, McDonalds, Motorola Solutions, Raytheon, Target, and United Health.

On Vail Resorts (MTN)

- Own 7 ski resorts in North America: mountain, lodging, & real estate.
- Apollo Group bought the company in 1990s and IPO in 1996
- Some real estate of about $150mm in this business and think they will sell for $200mm over next year or so
- Last 5 years generated a lot of cash but invested in resorts
- Next 5 years is slated to increase FCF
- Average payout ratio of 8%

Question & Answer Session:

- Buffett should not pay out dividend because he has so many different investment opportunities than standard company with only 1 business line.

Disclaimer

The content provided within this website is property of MarketFolly.com and any views or opinions expressed herein are those solely of MarketFolly.com and do not represent that of any firm or institution. This website is for educational and/or entertainment purposes only. Use this information at your own risk. MarketFolly.com is not an investment advisor of any kind, so do not consider anything on this page to be legal, tax, or investment advice. MarketFolly.com is not responsible for any third party links or content. MarketFolly.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.